SEARS CREDIT SCANDAL

Having already shelled out $313 million to settle lawsuits involving its aggressive debt collection practices, Sears, Roebuck and Co. still faces what could be the most troublesome fallout from the episode: a settlement of a civil case -- and possible criminal charges -- waged by federal prosecutors.

High-stakes settlement talks are under way in Boston, where U.S. Attorney Donald Stern has been meeting with Sears attorneys, including hired-gun defense attorney Robert Fiske, former Whitewater independent counsel.

More than a dozen former and current Sears employees have been interviewed by lawyers from Mr. Stern's office and by FBI agents, according to sources familiar with the probe.

Their aim is to discover whether Sears employees intentionally skirted the law by engaging in overzealous debt collection tactics with credit card customers in bankruptcy, and to identify who at the company may have condoned the practice.

Neither Sears nor the U.S. attorney's office would comment on the status of the investigation, which could conclude in mid- or late April.

CEO Arthur Martinez has blamed the wrongdoing on flawed legal advice. Since last year, the company has denied that top executives were aware of any wrongdoing until a year ago, when it was brought to light in a Massachusetts Bankruptcy Court.

Still, Mr. Martinez has acknowledged that a settlement of the federal probe will result in housecleaning. And sources familiar with the company say Sears already has targeted for possible dismissal a handful of mid-level employees in the credit and legal departments who worked on collecting debt from customers in bankruptcy.

Because Sears cannot discuss the case with its workers, several employees have been left to speculate for months whether they are among the group that will be fired.

Best case/worst case

At best, these workers could be dismissed and collect a generous severance package in exchange for a graceful exit, according to sources familiar with Sears. At worst, they could be indicted on criminal charges and forced to shoulder massive legal bills to defend themselves.

The highly secretive negotiations could result in a criminal charge against Sears, putting the Hoffman Estates retailer in the ranks of Archer Daniels Midland Co., Baxter International Inc. and other corporate titans whose reputations have been sullied by federal probes.

Another scenario could involve a fine to resolve the civil case opened last year by the U.S. attorney in Boston. In that case, federal prosecutors accused Sears of mail fraud in order to obtain an injunction to stop allegedly illegal collection of debts.

"I would be surprised at the end of the day if they decided to indict Sears unless, in this investigation, they turn up hard evidence there was someone at Sears who understood what they were doing was improper," says civil litigation expert Philip Beck, a partner with Chicago-based Bartlit Beck Herman Palenchar & Scott, who is not working on the Sears case.

Sears already has paid $40 million to settle cases with attorneys general in 50 states, as well as $273 million in refunds and other costs to settle class-action lawsuits with consumers. It could pay another $20 million to settle two lawsuits accusing Sears of misleading investors.

Last year, the company took a $475-million pretax charge to cover anticipated costs to resolve the mess.

The charge more than wipes out the estimated $115 million Sears added to its coffers by wrongly collecting debt from 200,000 credit card customers between 1992 and early 1997.

Sears collected several hundred million dollars legally from credit card holders who bought stereos, refrigerators and snowblowers on their Sears credit card and later filed for bankruptcy.

Instead of giving up on them after their bankruptcy filings, Sears negotiated "reaffirmation agreements"; in exchange for avoiding the repossession of merchandise, these consumers agreed to make low monthly payments for the purchases after emerging from bankruptcy.

However, Sears ran into trouble by failing to file all of these agreements in Bankruptcy Court.

Law is clear

While the oversight may appear to be minor, the company had good reason to avoid the courts' review. Consumers who agree to keep paying for $1,000 in debt at 21% interest, for example, may wind up paying three or four times the value of their original purchase before the debt is paid.

"It's not an area of the law that's subject to interpretation," says John Roddy, a Boston lawyer who represented consumers in the class-action settlement. "Companies have to file agreements like this with the courts. If they don't, they can't collect the money."

While Sears halted improper debt collection practices last year, it continues to be rocked by the scandal. Like the prosecutors in Boston, many observers continue to question who at Sears knew about the wrongdoing and when they knew it.